How do corporates benefit from sale of road assets?

When Infrastructure Leasing and Financial Services Ltd (IL&FS) first got into a financial crisis in the middle of 2018, it was not expected to be a very serious issue. The situation, however, deteriorated quite rapidly from that point. With short term CPs maturing and long term money stuck in infrastructure assets, it was a classic problem of an asset liability mismatch. With the new management under Uday Kotak taking charge of the future of IL&FS, the big challenge now is to monetize the road and other assets of IL&FS. Experts estimate that nearly 65-70% of the outstanding loans of Rs.91,000 crore should be recoverable by the sale of road and other assets. But why should corporates look at these road assets at all?

Where does the IL&FS asset monetization story stand?

It is estimated that IL&FS has received over 30 expressions of interest (EOIs) for its road assets, which are currently being scrutinised. The road assets, classified under IL&FS’s domestic roads vertical include the engineering, procurement and construction (EPC) and operation and maintenance (O&M) businesses. All these discrete units were put up for sale as part of its debt resolution plan. In fact, interest has been evinced by two distinct classes of players. Some of the large P/E funds are looking at this as an opportunity to make an entry into the fast growing India infrastructure space. These are purely in the nature of investors who are willing to share the risk for the sake of long term returns. Such a move could also help the beleaguered IL&FS to become asset-light and improve their ROI in the process. The second class of investors are the infrastructure players including the road developers. These are the players who are looking to inorganically expand their infrastructure footprint within India by purchasing such projects at an attractive internal rate of return (IRR). This not only helps the infrastructure players to expand the project with minimum cost and also save them the profitability effort since these projects are being taken over at an attractive IRR only.

IL&FS may be in a hurry and buyers could get a better price…

The IL&FS group is undertaking the asset monetization programmes on a fast track basis to pay off its ₹ 91,000 crore debt. The good news for IL&FS is that the NCLT has given it a moratorium so that it does not have to worry about being classified as an NPA. That also vies breathing space to the investors who hold the bonds. The business sale includes the sale of the securities business, the renewable energy assets, the roads portfolio and its EPC capabilities. All asset sales will be subject to requisite approvals, including from the NCLT.

The proposed sale of the stakes held by the IL&FS group in these road assets may be carried out as a basket, individually, or as an undertaking, comprising all assets and businesses put on sale. The final methodology and the modus operandi are yet to be finalized. The IL&FS board had appointed Arpwood Capital Pvt. Ltd and JM Financial Ltd as financial and transaction advisors, and Alvarez and Marsal as resolution consultants. This sense of urgency implies that the company may close out the deal very fast so that the money can at least be partially returned to the creditors.

Assets on the block: how buyers can benefit from them

IL&FS is putting up some prime assets up for sale on a negotiated basis. The assets on the block include 7 operating annuity-based road projects of about 1,774 lane km, 8 operating toll-based road projects of 6,572 lane km, four under-construction road projects of 1,736 lane km, besides three other EPC and O&M businesses, and a sports complex in Thiruvananthapuram. How can buyers and bides benefit from this?

It gives them access to a high quality portfolio of road assets that may require years to build organically over time.

Secondly, IL&FS has to work against time. The RBI has filed for declaration of IL&FS dues as NPAs and that would mean that the company does not have time on its hand. That makes a perfect case for bidding the assets at a reasonably good price.

It allows buying corporates to build a complete portfolio of road asset to either supplement or complement their existing road and other infrastructure assets. It enables them to pick and choose infrastructure assets based on the unique needs.

Lastly, companies can choose road assets based on their weighted average requirement. This makes a more object assessment possible.